What is Net Revenue Retention Rate (NRR) and How Is It Calculated?
There are several new measurements and metrics that recently have become vital to our understanding of the SaaS industry and the businesses involved. Net Revenue Retention is among those that I will be talking about in this article today.
Churn is the most common fear factor that you must constantly be combatting. In a world full of options, always keep in mind that your customers have numerous choices that they can choose from instead of working with you. It has become dangerously easy for them to switch to your competitors. This is exactly why you need the right metrics to measure your business health regularly, track down what's wrong, fix it immediately, and guarantee a phenomenal customer experience.
Based on these life-saving metrics, you can take corrective actions and keep your growth path smooth and efficient.
Today, let's read about one of the most vital metrics to help you achieve just that. I represent you: The Net Revenue Retention.
What is Net Revenue Retention?
Net Revenue Retention is the customer retention metric that tells you the percentage of your recurring revenue from your existing customer base that you retained over a certain time period. It is sometimes called Net Dollar Retention (NDR), and it primarily focuses on customer downgrades, customer upgrades, and revenue churn to let you know the likelihood of your business growing from your current customer base alone without putting more effort and acquiring new ones. At this point, it's important to keep in mind that NRR does not include or focus on new customers.
Several SaaS founders often underrate NRR in the early stages of their growth; however, it is a crucially important indicator of the profitability level of your company over time since as we all know, getting new customers is always costlier than retaining an existing one. This is why you need a bullet-proof customer retention strategy that will be a game-changer in the overall customer retention rate and customer acquisition costs, as well.
In a very simple perspective, NRR helps you measure growth rate and enables a glimpse into your customers and the overall revenue they represent to your organization over a period of time, which makes it a broad metric that you need to follow with your customers over time.
Given this information, it's safe to say that understanding Net Revenue Retention and what its components are telling us is crucial in terms of your goal setting and decision-making processes, how you organize your business plans ahead to transform and improve your relationship with your customers in order to deliver even more value and achieve customer satisfaction through a more realistic picture.
Why is net revenue retention important?
NRR is a key metric that specifically considers subscription business owners, SaaS companies & leaders as it does an amazing job enabling them to see how sustainable their business' annual revenue growth is and will likely be in the future.
Therefore, it has a special place within the SaaS industry because it does not only measure customer retention or expansion from upgrades but also your company's ability to MAINTAIN engagement, keep it at a sufficiently high level, bring constant improvement, and surpass the expectations and requirements of your customers as a natural result.
Since creating new subscriptions is quite complex and costly, SaaS businesses interested in business growth opportunities should keep in mind some factors such as cross - sales, upselling, and delivering new products and experiences to their current customer customers.
These activities will bring valuable and cost-friendly revenue expansion and make it seamless to improve customer lifetime value. (LTV)
Again, all of this connects to NRR since for these tactics to work smoothly, it is critical to understand how well you are providing your service to your customers, and that is exactly what NRR shows you.
How to Calculate Net Revenue Retention Rate
To calculate NRR, you first need to:
- Subtract lost revenue from total revenue.
- And divide by your starting amount.
In this formula, the lost revenue, being negative churn and account contraction, must be subtracted from total revenue, which is starting recurring revenue plus account expansion. And later on, that number will be divided by the starting amount.
Let's say you are calculating your NRR for this current month, May 2022. The things you need to know for this calculation are:
- Starting MRR
- Expansion MRR
- Contraction MRR
- Churn MRR
Starting MRR is the amount of recurring revenue that you were gaining from your customer base the previous month before your calculation.
Expansion MRR is the percentage of new revenue that is gained from existing clients this month, from upsells and cross - sales.
Contraction MRR is the amount of revenue that was lost from your active customer base resulting from downgrades.
Churn MRR is the amount of recurring revenue that was lost from customers who churned.
5 Tips to Improve Your Net Revenue Retention Rate
There may be numerous reasons for your NRR being less than 100%, but in this part, I will be talking about the most common issues, ways to overcome them, and some quick tips to make improvements.
Reason number 1 is that you may not have a solid customer marketing strategy. I know it's bold to make assumptions, but, this one is almost always correct.
Reason number 2 is that you may not be paying enough attention to churn bleed.
Or, you're missing upsell opportunities.
So, what can you do about these?
Let's see what I've got.
Step up your Customer Service Game
Great customer service is proven to minimize churn and increase your NRR as a result. I mean, does this even come as a surprise? It shouldn't be because good customer service is basically the foundation of your customer success department. Still, the question here is, to improve something so critical, what exactly do you need?
- Your marketing efforts need to be more customer-centric. Your customers will always need constant support during their journeys, and you should be able to meet this need whenever they require it. Your roles and responsibilities should focus on optimizing the overall customer journey.
- Provide quick assistance. Great customer experience is extremely dependent on how quickly and easily you can assist the client.
- Make your customers happy. Make them feel heard. Send them personalized emails and resources to keep them engaged and interested.
Aim for Product Engagement
The key to retention and upselling is often closely tied to understanding a customer's journey, what they are going through, and what they are experiencing while using your product. So, how does your customer engage with your product and your features? This is the part where you should focus while collecting active customer data and detecting possible fractions within the experience you provide.
So, how to master this?
- First things first. Make sure your onboarding flow is seamless.
Onboarding is the very first part where you provide your initial value. You introduce your product to your customer and convince them that it is the product they are looking for, given the features and usability factors. And obviously, a seamless onboarding flow indicates that the customer has no difficulty focusing on these factors and appreciating their values.
- Be communicative about your new features and announcements.
Communication is key. Be sure to send out announcements, alerts, and emails on new features, innovations, and any kind of changes you make within your product. You'll never know which specific feature will meet the needs of an active customer or become their go-to solution! Also, if you have a bit more complicated product, you should definitely use training material, assignments, lists, and interactive content in your blog and emails to make sure your customers are getting the most of what you're offering.
- Use tools when necessary - data & insights
Believe me when I tell you that data is the only correct thing you can trust without thinking twice. That rhymed!
Anyway, you can use certain tools that integrate with your CRM to gain actionable insights that will directly impact your revenue expansion. This data gained from your customers will enable you to take the first action before a problem even occurs. As long as you use products and tools that combine data with AI, you will have real-time health scores that you can use, understand and decide when to upsell, retain, and step in in case of emergency.
Frequently Asked Questions
What is the difference between NRR and GRR?
Unlike NRR, your GRR rata cannot go beyond 100%, since it has no job dealing with the growth of your existing customer revenue. NRR is a measurement of maintainable revenue growth, while GRR is primarily used by analysts and customer success teams to try and get a better understanding of income retention.
Does NRR include new customers?
NRR refers to the percentage of the retained revenue from your existing customer base. It's a wide metric that lets you have a peek into what your additional revenue streams will look like for your company over time IF there are NO new customers.
What is SaaS net retention?
SaaS Net Retention -Net Revenue Retention- is a SaaS metric that helps you calculate, track, understand, and implement the percentage of revenue that is retained from your current customers over a certain time period (generally on a monthly or yearly basis), which includes downgrades, upgrades, cross - sales, and cancellations.